EA Rising: Street Looks Past ‘Medal,’ Console to Better Times

By Tiernan Ray

Shares of Electronic Arts (EA) are up 54 cents, or 3.5%, at $15.62, after the company last night reported fiscal Q3 revenue that missed analyst estimates but beat on the bottom line by a penny, forecast this quarter’s results below consensus.

Sales of $1.18 billion missed the consensus $1.29 billion, while EPS of 57 cents was better by a penny. For this quarter, the company sees revenue of $1.03 billion to $1.13 billion, and EPS of 57 cents to 72 cents, versus the consensus $1.22 billion and $71 cents.

The quarter was marked by “weak” sales of Medal of Honor, and by what analysts describe as “sluggishness” in the console gaming market.

Price targets and ratings are mostly staying in place today, as most of the Street cuts estimates, and both bull and bear seem to believe better times are around the corner.

Doug Creutz with Cowen & Co., who this morning reiterates an Outperform rating on the stock, calls this the equivalent of “clearing the decks,” by which he thinks the company has set itself up to move past what has been a terrible year for its game sales:

We note that in a year where many things have gone wrong for the company (‘Star Wars’, ‘Medal of Honor’, NHL strike, another scrapped NBA title, decline of the social gaming vertical), EA should still manage to post flat or up EPS y/y in what is the worst sales decline that packaged goods video games have ever endured. With guidance for FY13 now appropriately set, and FY14 likely to enjoy growth driven by the next ‘Battlefield’ title, we are willing to be more aggressively positive on Outperform (1) rated EA shares given a likely console cycle this fall.

Creutz cut his estimate for this year’s revenue to $3.81 billion from a prior $3.97 billion, while raising his EPS estimate from 82 cents to 93 cents.

Notes McGowan, “Battlefield 3Premium continues to sell well ($28mm in 3Q, $108mm to date) and will be recognized in 4Q; these sales are extremely high margin as the associated costs have already been realized in prior periods.”

McGowan cut his estimate for this year to $3.84 billion and 95 cents from a prior $4.2 billion and $1.15, and cut next year’s view to $4.08 billion and $1.25 from a prior $4.65 billion and $1.45.

“On the positive side, we expect better product momentum in Feb/Mar followed by new console announcements in the spring, and downside also limited by $5/share in cash.”

The “key” for EA is sales of digital downloads:

Digital revenues grew 8% Y/Y to $407 million, despite a tough comp from Battlefield last year, with Mobile games increasing 20% as the contribution from smartphone/tablet apps are now outpacing declines in featured phones. Console DLC also grew a robust 46% Y/Y to $158 million; however, this was offset by weak PC download revenue of $148 million (-20%). Overall, we still see Digital as a key anchor to provide some earnings stability at this late-cycle stage, as well as a competitive leg up on new console platforms.

Sebastian cut his fiscal 2013 EPS estimate to 95 cents from $1.06, on sales of $1.1 billion. He cut his 2014 estimate to $4.25 billion and $1.15 per share from $4.35 billion and $1.25.

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